What's going on?
On Monday, luxury conglomerate LVMH – owner of Louis Vuitton, Dior, and Moët & Chandon – announced its $15 billion bid to buy US jeweler Tiffany & Co. Clearly someone has expensive tastes…
What does this mean?
Tiffany’s has had a blue year: its second-quarter sales were lower than forecast, and it issued a profit warning after Chinese demand slowed. The retailer is now looking to turn its fortunes around – and LVMH, which has a history of polishing up acquisitions, thinks it can help.
But there’s no guarantee Tiffany’s will marry LVMH for its money, especially after its share price shot past LVMH’s per share bid price on Monday. Tiffany’s is expected to reject the offer – which is only 14 times its earnings, versus the 22 times Michael Kors paid for Versace last year – as an undervaluation. That could trigger a bidding war between LVMH and its two arch-rivals: Gucci-owner Kering and Cartier-owner Richemont.
Why should I care?
For markets: The pros of consolidation.
The luxury goods industry has seen a wave of mergers and acquisitions in recent years, in part because expanding into growing markets – like China – is so pricey. Tiffany’s has also taken the trade war to heart: it can’t rely on Chinese tourists coming to the US to buy bling, and doesn’t have many of its own stores over there. It’d benefit from LVMH, then, which has a massive presence in China. LVMH would benefit from Tiffany’s too: it’d have a younger, less wealthy customer base to tap into.
The bigger picture: Making beautiful music.
The LVMH-Tiffany’s deal is an example of a “horizontal” merger, where two competitors join forces. But it’s not the only type of pairing in vogue. A vertical merger – where companies within the same supply chain join up – has worked for Spotify, which bought podcast producer Gimlet earlier this year. On Monday, it hit the high notes with impressive subscriber growth – and investors danced to its tune, sending shares up.